Mortgage Banking Update - September 21, 2012

by Ballard Spahr LLP
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DOJ Fair Lending Focus Continues in Settlement of Case Challenging Lender's Minimum Loan Amount Policy

The Department of Justice's recent announcement that it had settled its case against Luther Burbank Savings challenging Luther's minimum loan amount policy demonstrates the DOJ's continued focus on fair lending. The settlement underscores the need for lenders to have their lending policies reviewed by counsel for compliance with fair lending laws and to be prepared to defend such policies against fair lending challenges.

The DOJ's complaint, filed in the U.S. District Court for the Central District of California, alleged that from 2006 through mid-2011, Luther enforced a $400,000 minimum loan amount policy for its wholesale single-family residential mortgage loan program. The DOJ charged that the policy violated the Equal Credit Opportunity Act and the Fair Housing Act because it had a disparate impact on the basis of race and national origin. Using Home Mortgage Disclosure Act data reported by Luther and other residential mortgage lenders, the complaint alleged that Luther originated significantly fewer single-family residential mortgage loans to African-American or Hispanic borrowers or in majority-minority tracts throughout California than comparable prime lenders.

The settlement, which must be approved by the court, requires the bank to make available at least $1.1 million in a special financing program designed to increase Luther's residential mortgage loans to qualified California borrowers seeking loans of $400,000 or less. Luther must also spend at least (1) $450,000 on partnerships with community-based organizations that provide credit and financial services to minorities, (2) $300,000 on targeted advertising and marketing to minorities, and (3) $150,000 on credit counseling, financial literacy and other consumer education programs. Luther is prohibited from establishing or implementing a $400,000 minimum loan amount policy and must notify the DOJ before increasing its current $20,000 minimum loan amount (which took effect in 2011 after the lawsuit was referred to the DOJ by the Office of Thrift Supervision). The settlement also requires Luther to provide fair lending training to its employees and to offer such training to brokers who refer loans to the bank.

While the DOJ may continue to pursue disparate impact claims that are already in its pipeline, that legal theory is on shaky ground. In fact, the U.S. Supreme Court could have another opportunity to decide whether disparate impact claims are available under the Fair Housing Act if it grants the petition for certiorari filed in Mount Holly v. Mount Holly Gardens Citizens in Action, Inc. As discussed in our prior legal alert, the issues in Mount Holly are virtually a carbon copy of those raised in Magner v. Gallagher, which was dismissed by the parties soon before the Supreme Court was scheduled to hear oral argument. 

As a possible harbinger of future DOJ actions, the DOJ last month announced the settlement of a "pattern or practice" fair lending lawsuit against GFI Mortgage Bankers, Inc., that restyled a disparate impact case as a "knew or should have known" disparate treatment case. The settlement required GFI to pay a total of $3.555 million, consisting of $3.5 million in monetary damages to aggrieved borrowers and a $55,000 civil penalty. Our prior legal alert about that settlement questioned the DOJ's attempt to use disparate impact evidence to establish that GFI had engaged in intentional discrimination. 

Because of the importance of these cases to our clients, Ballard Spahr will be conducting a webinar on "Fair Lending Lessons from the DOJ's Settlement with GFI” on Wednesday, October 10, 2012, from 12 p.m. to 1 p.m. ET.  To register, send an e-mail to questions@ballardspahr.com.

To help consumer credit providers prepare for examinations and to prevent, manage, and defend against the increasing number of fair lending challenges, Ballard Spahr has created a Fair Lending Task Force. The task force brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of Consumer Financial Protection Bureau examinations), litigators who defend against claims of fair lending violations, and attorneys who likewise understand the statistical analyses that underlie fair lending assessments and discrimination claims.

Barbara S. Mishkin


New York Federal Court Certifies Class Alleging Fraudulent Collection Practices Based on Documentation Deficiencies

A recent decision by a New York federal court provides yet another example of the documentation-related challenges that creditors and debt buyers are increasingly facing in collection actions involving non-mortgage consumer debts.

In its opinion in Monique Sykes v. Mel Harris and Associates, LLC, issued September 4, 2012, the U.S. District Court for the Southern District of New York granted class certification in a case alleging that a debt buyer, law firm, and process service company had engaged in a scheme to fraudulently obtain default judgments against more than 100,000 consumers in debt collection actions filed in state court.

The complaint alleged that the process service company had regularly engaged in "sewer service" by failing to serve the summons and complaint. It further alleged that, after a debtor failed to appear in court for lack of notice of the collection action, the debt buyer and law firm would seek a default judgment based on a false "affidavit of merit" attesting to their personal knowledge of the "facts and proceedings" relating to the action and a false affidavit of service.

According to the court, the plaintiffs had established that the affidavits of merit were "generated en masse by sophisticated computer programs and signed by a law firm employee who did not read the vast majority of them and claimed to, but apparently did not, have personal knowledge of the facts to which he was attesting." The employee typically did not receive the original credit agreement for a particular debt included in a portfolio of purchased debts. Instead, the employee received a bill of sale for the portfolio that included sample credit agreements and warranties from the portfolio seller. The court noted that even if the credit agreement existed (which it often did not), the employee's standard practice was to rely on the warranties and database information instead of reviewing the agreements before signing an affidavit of merit.

The evidence showed that after producing the affidavits of merit in batches of up to 50 at a time, the law firm's employee would do a "quality check" of one affidavit per batch to confirm that the affidavit information matched the database information. If both sets of information matched, he would sign the remaining affidavits without reviewing them. The employee would sign as many as 350 affidavits of merit in any given week.

The plaintiffs also alleged that, because the defendants had regularly engaged in "sewer service," the affidavits of service that accompanied the affidavits of merit were also often false. According to the court, evidence showing hundreds of instances of the same process server executing service at multiple locations simultaneously provided substantial support for the plaintiffs' "sewer service" allegations.

In addition to claiming that the defendants' conduct violated the Racketeer Influenced and Corrupt Organizations Act and New York's General Business Law and Judiciary Law, the complaint alleged that the defendants had violated the Fair Debt Collections Practices Act by filing false affidavits in the collection actions. The court, in finding that the plaintiffs had satisfied the commonality requirement for class certification, noted that there is conflicting case law on whether making false representations in court, rather than to the debtor, violates the FDCPA.

To assist clients in responding proactively to the current rash of documentation-related challenges being faced by the debt collection industry and creditors attempting to collect their own debts, Ballard Spahr’s Consumer Financial Services Group recently formed a Collection Documentation Task Force. The task force conducts extensive audits of collection procedures and counsels on best documentation practices. It brings together litigators with experience defending mortgage lenders and other consumer lenders in documentation-related lawsuits nationwide and regulatory lawyers with deep knowledge of the Office of the Comptroller of the Currency’s national bank foreclosure review process and federal and state debt collection laws.

Ballard Spahr lawyers regularly consult with their clients engaged in consumer debt collection on compliance with the FDCPA and state debt collection laws. As summarized in a prior legal alert, the Consumer Financial Protection Bureau has issued a proposal to supervise certain debt collectors and debt buyers as “larger participants.” The CFPB will soon be examining debt collectors and debt buyers who qualify as “larger participants” or who act as service providers to entities supervised by the CFPB, such as payday and private student loan lenders. We are currently conducting compliance reviews for debt collectors and debt buyers in anticipation of their first CFPB examinations.

Barbara S. Mishkin


Pennsylvania Supreme Court Rejects Class Certification in Consumer Financial Services Case

The Pennsylvania Supreme Court has unanimously reaffirmed the principle that consumer claims requiring fact-intensive, individualized inquiries are not amenable to class certification. In Basile v. H&R Block, Inc., decided on September 7, 2012, the court expressly rejected “the tendency toward sanctioning the use of class actions as a convenience to address colorably meritorious claims in an aggregate fashion,” despite acknowledging that such claims “might not otherwise be capable of being redressed practically on an individualized basis.”

The 19-year procedural history in Basile is, as the court described it, “lengthy” and “circuitous.” Basile was one of several class actions brought against H&R Block in the 1990s targeting its “Rapid Refund” program, whereby customers could receive the amount of their income tax refunds as a short-term high-interest loan to be repaid upon receipt of the refund. Basile filed her putative class action suit against H&R Block in 1993, alleging, among other things, that it had a confidential relationship with its unsophisticated customers regarding the Rapid Refund program and that it improperly exploited that relationship by steering those customers into that program without disclosing material information regarding the loans, including the very high interest rate.

Although a class was certified initially, the trial court ultimately decertified it. The court reasoned that common issues no longer predominated because proving the existence of a confidential relationship would require individualized inquiries into whether each of the 600,000 class members had the requisite trust in H&R Block's expertise. In 2010, the Superior Court reversed that order, reasoning that proof of complete trust was not necessary to show a confidential relationship. It also found that plaintiffs had proffered enough evidence regarding “overmastering influence” to create a jury question that was common to the class.

The Pennsylvania Supreme Court disagreed and reinstated the trial court's decertification ruling. The court concluded that the confidential relationship inquiry, whether focused on “overmastering influence” or trust, was unavoidably individualized and fact-intensive, and “it is not appropriate to presume that Block’s marketing and customer relations strategies had the same impact on each and every putative class member.”

Significantly, the Supreme Court acknowledged that programs like Rapid Refund “have engendered intense criticism from consumer advocates and others,” but stated that “[t]he proper judicial response … is not to retroactively alter the procedural class action device or governing principles of appellate review to achieve [regulatory] ends.” The court concluded that “the Superior Court's concern with the impact of mass marketing and fringe banking practices on the financially disadvantaged” was outweighed by the “limitations inherent in the judicial rulemaking process … the impact of collectivized treatment of individualized claims on defendants’ substantive rights … and the limited policymaking role of the courts (as compared with the legislative branch) in terms of manipulating substantive law.” 

Burt M. Rublin and Nathan W. Catchpole


Maryland User Name and Password Privacy Protections Take Effect October 1

Beginning October 1, 2012, employees and job applicants’ personal e-mail accounts, Facebook pages, Twitter accounts, Pinterest pages, and similar accounts will gain more protection from Maryland employers.

Under the new law, employers in Maryland will be prohibited from asking or requiring employees or job applicants to disclose user names, passwords, or other means of accessing personal e-mail or social media accounts. Employers also will be prohibited from retaliating against employees or applicants who refuse to provide their personal account information, and from refusing to hire applicants simply because they refuse to disclose their personal user names and passwords.

Maryland became the first state to enact such a protection for employees in April 2012, but other states are quickly following in its footsteps. A similar law will take effect in Illinois next year. Legislation at the federal level has also been discussed.

The new Maryland law does give employers the following protections:

  • Employers may require an employee to disclose user names and passwords for nonpersonal accounts that provide access to the employer’s computer systems.
  • Employees may not download an employer’s proprietary or financial information to personal websites or other Internet sites or accounts.
  • Employers that receive information that an employee has used a personal website or Internet account for business purposes may investigate the matter to ensure compliance with applicable securities and financial laws.
  • Employers that receive information that an employee has downloaded an employer’s proprietary or financial information to a personal account without authorization may investigate the employee’s actions.

Employers with employees working in Maryland should review their hiring procedures and other employment policies and practices to ensure compliance with the new law. Employers elsewhere should weigh carefully the benefits and risks associated with seeking this type of information during the hiring process, and they should exercise caution and identify a legitimate business purpose before accessing the accounts of current employees.

Attorneys at Ballard Spahr can help employers revisit hiring policies to ensure compliance with the new law and advise them as to the risks of viewing Facebook pages and social media accounts of employees and job applicants. For more information, contact Timothy F. McCormack at 410.528.5680 or mccormackt@ballardspahr.com, or Michelle M. McGeogh at 410.528.5661 or mcgeoghm@ballardspahr.com.


California Adds Finance Lender Law/Residential Mortgage Lending Act MLO Exemptions

California recently amended its Finance Lender Law and Residential Mortgage Lending Act MLO licensing exemptions. Pursuant to the amendments, an employee of a federal, state, or local government agency or housing finance agency will be exempt from MLO licensing so long as the employee is acting only as a loan originator pursuant to his or her official duties as an employee. Employees of bona fide nonprofit organizations also will be exempt from MLO licensing. This exemption is available for those employees who exclusively originate residential mortgage loans with terms that are favorable to the borrower. In order for employees to qualify for this exemption, the bona fide nonprofit organization must register with the Department of Corporations on a yearly basis. These amendments take effect January 1, 2013.

Oregon Further Delineates Surety Bond Renewal Timing Requirements for Consumer Finance Licensees who Employ MLOs

Oregon has added a specific deadline for surety bond renewals for consumer finance companies that employ MLOs. Previously, the surety bond renewal was required to take place annually and concurrently with the license renewal of any MLO employed by the consumer finance company. Oregon recently added further clarification on this requirement. Now, in addition to annual and concurrent renewal, the corporate surety bond must be delivered to the Director of the Department of Consumer and Business Services by December 1 of each calendar year. Such surety bonds can be made effective as of December 31 of each calendar year. This rule was certified to be effective on August 1, 2012.

- Matthew Saunig

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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